Today's PRC Pt II: Letting SOEs Fail

Warren Buffett had a memorable turn of phrase when he said that we can identify who's naked when the tide rolls out. With the recent slowdown of China, we are seeing a similar phenomenon. Many--myself included--believed that the PRC would extend unconditional help to distressed state-owned enterprises (SOEs) when push came to shove. As any number of these SOEs are coming under distress, we are finding that there is no "blanket" coverage for these firms as quite a few have been left waiting for a state rescue that may never come:

China’s state-backed companies no longer have the ironclad support of
the government -- and that’s bad news for the equity bull market in
Hong Kong, says UBS Group AG.

Three of the seven Chinese companies
that defaulted on debt repayments this year are partly owned by the
state, including Baoding Tianwei Group Co. [also see here] The end of implicit
government support will drive up funding costs and undermine foreign
investor confidence in the 20 percent rebound by the Hang Seng China
Enterprises Index, said Lu Wenjie, a Shanghai-based equity strategist at
UBS.

Is it the end of implicit guarantees? If so, the risk factor may not be adequately "priced in" as of yet:

Defaults are a relatively new phenomenon in China, which had its first
such case only in 2014. The rising number of payment failures is
reverberating across the nation’s $3 trillion credit market, with
onshore junk debt heading for its biggest monthly selloff since 2014,
issuers canceling bond sales and Standard & Poor’s cutting its
assessment of Chinese firms at the fastest pace since 2003.

The widening
of credit spreads from eight-year lows also threatens an incipient
economic recovery, which has been mainly supported by a surge in cheap
lending.

It's the [Western] notion of "moral hazard" being realized: Instead of the PRC bailing out nationally-owned firms in the event of trouble, it appear as though it's becoming more selective. What remains to be seen, though, is what happens if and when the really large Chinese firms run into trouble which have systemic importance like, say, its four big banks. I believe the "too big to fail" phenomenon will be observed since the recent bankruptcies were all of (relatively) smaller firms.